Beyond Telecom Law Blog

This is the third of three entries analyzing telecommunications services agreements. The first—Overview—highlighted the structure and basic components of telecommunications services agreements. The second—Revenue Assurance—focused on the carriers’ interest and mechanisms for locking-in projected revenues. This third entry—Risk Mitigation—looks at damage caps, termination rights and indemnity obligations in carriers’ standard agreements.  

Customers Bear the Risks. In terms of substance and process, the carriers’ standard agreements are as one-sided as ever. Mutuality is limited to the standard disclaimer of consequential, special and incidental damages. The artificially low cap on damages is often limited to the carrier. This cap is laughable in light of the potential adverse impact of poor service on customers’ businesses and operations. As to process, customers may raise billing issues, but the standard billing dispute resolution provision typically provides that the carrier’s determination is final. Whether the parties agree to resolve disputes by litigation, arbitration or another form of ADR, all disputes should be subject to the agreed-upon process.   

Chronic Service Problems—Customer Beware. In light of the standard damages cap, the meaningful remedy for chronic service problems is termination of the service or the agreement. Several carriers undercut this option by limiting the consequences for poor service to credits offered under their Service Level Agreements (“SLAs”). The challenge is negotiating a service impairment threshold for which there is no opportunity for cure. (As a practical matter, a chronic service issue cannot be “cured”). As noted in an earlier entry, site-specific remedies are meaningless for chronic service issues associated with workhorse corporate data services—such as MPLS—in which hundreds, a thousand or more customer locations may be impacted. 

While the “termination remedy” imposes its own set of hardships--unplanned procurements and transitions to replacement carriers, customers should preserve this option. This is accomplished by negotiating provisions that provide (i) a reduction in the minimum revenue commitment equal to the value of the discontinued services for the balance of the agreement, and (ii) a reasonable transition period—not less than 90 days; six months is more realistic—to migrate traffic to a replacement provider. In addition, the underperforming provider should be obligated to issue a credit or pay the customer an amount equal to any increased cost for the replacement service. 

Why is the Customer Indemnifying the Carrier? Indemnity obligations vary widely, based on the services provider and the services in question. Customer indemnities (for the carrier’s benefit) should be limited because the vast preponderance of the customer’s risks—poor or unavailable service—are not and cannot be reasonably addressed because of the standard disclaimer on consequential, special or incidental damages. Some carriers demand indemnities against claims from customer’s users who suffer serious injury as a result of not reaching the local Public Service Answering Points (“PSAPs”)— when the VoIP/SIP user dials 9 1 1 at a location other than its “primary registered” location. The FCC’s regulations on VoIP and 9 1 1 calling should be sufficient. While some carriers reserve the right to suspend service for violations of the carrier’s Authorized User Policy (“AUP”), demanding an indemnity from customers against claims arising from non-compliance with an AUP is over the top. 

One major carrier’s standard agreement disclaims all liability for unauthorized access to customer’s communications. While it may be reasonable for a carrier to disclaim liability for unauthorized access to the customer’s information conveyed over its services, it is quite another to attempt to insulate itself from the misdeeds of its employees and contractors. Sadly, the FCC is not helping customers in terms of reasonable privacy expectations. The FCC’s Enforcement Bureau recently acquiesced, in effect, to Google’s view that Sec. 705(a) of the Communications Act does not bar non-parties to a wireless communication from securing the contents of non-encrypted Wireless communications.  Shortly thereafter, the FCC rushed out guidance on how to encrypt WiFi communications. 

Wireless Agreements—It Couldn’t Get Much Worse. Customers face a far steeper challenge in regard to Wireless service. Meaningful SLAs are few and far between. Wireless carrier agreements provide, in effect, that “if a subscriber is within range of an operational cell site having capacity to initiate and maintain the Wireless connection, service may be available.” More favorable “commitments” are sometimes negotiated, but SLAs as to access, availability or quality are feeble to nonexistent. Wireless carriers do address problematic service for business customers—at major corporate locations—through the deployment of distributed antenna systems (“DAS”) or bi-directional amplifiers (“BDAs”). The cost and terms of these arrangements vary widely. Customer self-help remedies for in-building coverage gaps are adamantly opposed by the carriers.           

Consumers and business customers access the same networks and procure largely the same handsets and laptop plug-ins. The two-year handset minimum commitment period drives enterprise agreements almost to the same extent as consumer transactions. Only recently has some differentiation between consumer and business Wireless services emerged, such as M2M and, most recently, an integrated LTE-MPLS offering from Verizon Wireless. Unlike data communications supported by Wireline services, wireless carriers clearly intend to control aspects of M2M applications.    

As a result of handset IP infringement litigation and the bundled nature of Wireless services and handsets, smartphones and tablets, Wireless agreements should provide practical remedies in the event continued use of infringing devices is banned. Carrier statements that customers look to handset manufacturers for equipment issues are laughable, at best. Each carrier picks the models, specifies the frequencies and may restrict/suppress certain technologies in the Wireless devices it offers for sale for use on its networks.

This is the second of three entries analyzing telecommunications services agreements.  This first—Overview—highlighted the structure and basic components of telecommunications services agreements.  This entry—Revenue Assurance—focuses on the carriers’ interest and mechanisms for locking-in projected revenues.  The third entry—Risk Mitigation—will take a closer look at the carriers’ views on damages, termination rights and customer indemnities.

Revenue Assurance

Fundamentally, standard Wireless and Wireline services agreements are drafted to ensure that customers spend the minimum amounts that they committed to spend.  After agreement on services and rates, negotiations inevitably shift to minimum revenue commitments.  Notions that the quality of services delivered or the support provided should impact this revenue stream are clearly lacking in carrier agreements and negotiating strategies.  It often seems that carriers are far more focused on revenue assurance, perhaps for internal revenue projections ultimately shared with stock analysts, than revenue growth.

Volume-Based Pricing—Yes and No.   Broadly speaking, pricing for Wireless and Wireline services are volume-based.  A study conducted by a leading consultant several years ago of publicly available data confirmed this point, but also disclosed substantial variability in rates for similar commitment levels.  Another theory, largely rejected by experienced customers and consultants, is that the larger the percentage commitment for a customer’s projected spend level, the more aggressive the pricing. 

Taxes, Surcharges and All Other Costs the Carriers Can Imagine.  Wireline and Wireless services are subject to an endless stream of taxes and surcharges imposed by the FCC, state agencies and state governments.  The largest surcharge is the Federal Universal Service Charge which the carriers have been permitted by the FCC to recover from their customers.  The current FUSF charge is 17.9% for interstate Wireline services; the so-called “safe harbor” percentages for Wireless service are noticeably less.

Unlike taxes imposed incident to the sale of goods to consumers, principally sales taxes, the carriers’ standard practice is to recover all surcharges and taxes imposed on them by state and local governments, from property taxes to gross receipts taxes, excluding only taxes on earned income.  These costs are typically recovered through one or more separate line items on customers’ bills.  The carriers also recover a range of  costs incurred in the operation of their businesses, such as regulatory compliance costs.

Thus, while rates may nominally be “fixed” under many services agreements, the recovery of taxes, surcharges and other variable costs is now approximating 20% of the net charges for Wireline services and because of the endless stream of state taxes, growing at a healthy clip for Wireless services.   The rising levels and litany of taxes and surcharges drive customers to renegotiate rates and re-procure services. They must do so to minimize substantial increases in expenditures for telecommunications services. 

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This is BeyondTelecomLawBlog’s first annual Telecom Legal/Policy Projections for the New Year. While multiple policy and legislative initiatives were launched in 2010 and 2011, we expect the courts, the FCC and Congress to define the scope of these initiatives in 2012.

Net Neutrality Order Heading for Reversal in Court of Appeals.  Assuming the D.C. Circuit Court of Appeals rejects the FCC’s motion to hold in abeyance review of the Net Neutrality Order, this Order likely will be overturned in 2012. Despite legitimate concerns regarding potential abuses by facilities-based ISPs, the FCC is challenged to argue that the Communications Act empowers it to regulate these ISPs as comprehensively as Title II of the Act authorizes regulation of telecommunications carriers and telecommunications services. The D.C. Circuit rejected a far less expansive assertion of Commission authority over Internet traffic management practices in the agency’s Comcast-BitTorrent decision.  

USF Order Likely to Survive Despite Judicial Challenges.  Thirteen petitions for review of the FCC’s USF Order filed in eight circuit courts of appeals are now consolidated in the 10^th Circuit. The migration to “bill and keep” is subject to Petitions for Review and Petitions for Reconsideration filed with the FCC. Wireline carriers (except AT&T and Verizon) are concerned with the adverse revenue impact of “bill and keep” for non-access Wireless-to-Wireline traffic. While petitioners may prevail on some issues, the FCC’s major restructuring of the USF program likely will survive.

Pressure Building for USF Contribution Reform.  The USF Contribution Factor for the 1^st Quarter of 2012 is set at the unprecedented level of 17.9%, driving more data traffic to Internet-based VPNs, accelerating the demise of POTS and undermining growth in Wireless and Wireline services. This should prompt the FCC to revisit its rules governing USF contributions, perhaps migrating to a “numbers-based” approach or assessing a percentage of retail Internet access service revenues attributable to the telecommunications component embedded in this service. This latter makes sense as broadband Internet access service will now be supported by USF.

It May Be Lights Out for LightSquared.  The FCC will rule on LightSquared’s proposal to operate a mobile broadband service on MSS spectrum. While the FCC is unabashedly committed to rolling out Wireless broadband, the interference concerns of government and industry GPS users likely will prove insurmountable. 

Congress Likely Will Allocate the D-Block to Public Safety and Authorize Incentive Auctions of TV Broadcast Spectrum.  Though ultimately stripped from the House payroll tax legislation, provisions allocating the 700 MHz D-Block to Public Safety and granting the FCC authority to conduct incentive auctions of licensed TV broadcast spectrum, elicited an extensive response from FCC Chairman Genachowski. Inasmuch as auction revenues offset Federal budget shortfalls and the House and Senate Commerce Committees largely agree on the D-Block, legislation incorporating these proposals likely will pass in 2012. 

FCC to Address 700 MHz Handset Interoperability; No Indication on Handset Exclusivity Reform.  In authorizing the assignment of Qualcomm’s 700 MHz licenses to AT&T, the FCC committed to initiating a proceeding on the interoperability of Wireless (broadband) devices operating on frequencies in the 700 MHz band. Smaller wireless carriers have secured licenses to operate on the Lower 700 MHz band frequencies in some rural and urban areas, but not nationally. Without interoperability at least with AT&T (Verizon’s C-Block 700 License is in the Upper 700 MHz band), these carriers may be forced to sell or surrender their 700 MHz spectrum. 

Another overarching issue is whether the FCC will review exclusivity arrangements between device manufacturers and the major Wireless carriers. Handset exclusivity was the single claim Judge Huvelle allowed Sprint to pursue in connection with its antitrust suit against the AT&T-T-Mobile merger. Longstanding agency indifference toward this issue contrasts sharply with the FCC’s interest in making Wireless broadband available throughout the country. As demonstrated by the iPhone, advanced devices drive Wireless broadband service adoption. 

In late November, AT&T and T-Mobile withdrew their application for FCC’s consent to their proposed merger because of an anticipated adverse decision signaled by FCC Chairman Genachowski, opting to focus their efforts on the Department of Justice’s antitrust case.  The carriers’ apparent assumption was that the FCC would surely grant a re-filed application consistent with the court’s favorable ruling.

As it initiated the process, AT&T believed its strategy of orchestrating apparent support from every imaginable interest group, conducting a relentless media campaign, leveraging its influence in Congress, and playing to the FCC’s intense interest in broadband deployment would overcome any concerns over market concentration in the increasingly important Wireless market.  AT&T is beginning to grasp that critical decision makers do not share its insular belief of inevitable success.

On December 9, 2011, as reported by Grant Gross, U.S. District Judge Ellen Segal Huvelle responded empathetically to DoJ’s request to stay the litigation or dismiss the lawsuit without prejudice until such time as AT&T and T-Mobile re-file their application with the FCC.  DoJ maintains that the carriers’ withdrawal of their application from the FCC, there is no active deal warranting the court’s deliberations.  Judge Huvelle reportedly has directed DoJ to file a motion in support of its position next Tuesday and scheduled a hearing for December 15, 2012.

As reported by Bloomberg’s Tom Schoenberg and Sara Forden, with apparent equal measures of candor and arrogance, AT&T’s trial counsel responded to DoJ’s position by advising Judge Huvelle “[w]ithout a speedy court case, the deal is dead....It's either a trial on our timetable, or there's no trial at all."  While AT&T may still prevail, it is so very refreshing that the FCC and DoJ, respectively, have taken a hard look and decided to stand up to AT&T.  Judge Huvelle should reject AT&T’s latest demand that the DoJ’s lawsuit be conducted “on [AT&T’s] timetable” or not at all.   

Do you know whether and how your websites use “cookies” or other technologies to collect information from users and/or target advertising?  Do you know what information is being collected and how it is being used?  The Federal Trade Commission has endorsed an online “Do Not Track” mechanism, and recent inquiries, investigations, and lawsuits relating to the use of cookies and other technologies online have put the issue in the spotlight: 

• Sen. Jay Rockefeller, who introduced a “Do Not Track” bill earlier this year, plans to hold a hearing on Facebook’s use of cookies following a USA TODAY report.  Rockefeller sent letters to Visa and MasterCard last month about their information collection practices. 
• Reps. Ed Markey and Joe Barton, who introduced a “Do Not Track Kids Act” earlier this year, have also made inquiries to Facebook about its information collection practices. 
• The FTC is reportedly close to reaching a settlement with Facebook over allegedly deceptive privacy practices.
• Earlier this month, the FTC entered into a consent agreement with the online advertiser ScanScout regarding claims that consumers could opt-out of targeted ads by changing their browser settings to remove or block cookies, when in fact it that was not possible with flash cookies. 
• Several private lawsuits were brought in 2010 and 2011 relating to the use of tracking technologies on websites, which alleged violations of various federal and state laws.

It may be some time before a comprehensive federal privacy law is adopted, but we can expect that the FTC will continue to exercise its authority over unfair and deceptive practices and plaintiffs will continue to pursue privacy-related lawsuits.  With this evolving landscape, it is important for a company’s review of its privacy policies and information collection practices to encompass not only personal information, but also information that has historically been deemed “non personal” in nature (e.g., pages viewed, referring websites, and the like).